Market strong for Asian CDOs

New angles

Asia’s synthetic collateralised debt obligations (CDO) market continues to hum withactivity, despite a squeezing in of credit spreads to record levels over thelast month.

The CJ 50, a multi-dealer index tracking the 50 most liquid credit default swapsin Japan, was at 31.37 basis points at the beginning of October. But that hasn’tdeterred French Bank BNP Paribas from launching its largest Japanese syntheticCDO.

Launched at the end of September, the deal is the latest in its Serena Financeseries of arbitrage structures. However, this time, the bank has teamed up withJapanese firm Norinchukin Securities to distribute the deal to its Japanese customerbase.

“This is the first time we split the arrangement and distribution of a Serenatransaction. It was a tailor-made transaction for Norinchukin Securities, andthey are distributing it to their customer base of regional agricultural co-operativebanks,” says Shun Cajot Yoshida, senior structurer in the credit derivativesdepartment at BNP Paribas in Tokyo.

Called Serena N1, the five-year deal is referenced to 70 Japanese credits, wortha notional amount of ¥210 billion ($1.9 billion). The structure comprisesfive tranches of notes totalling ¥15 billion and rated between BBB– toAAA by Japanese ratings agency Ratings & Investment Information.

“The reason behind this is that, even though spreads have tightened in Japan,there are more and more different types of clients that are willing to buy CDOs,” saysYoshida. “So spreads are not the only reason clients buy CDOs. You haveto take into account the Japanese credit environment, which makes it very difficultfor Japanese financial institutions just to buy bonds on the cash market. Thereis no liquidity, so it is difficult to get exposure to a diversified pool ofcredits in the current cash bond market in Japan.”

Meanwhile, Singapore’s UOB Asset Management has tapped the synthetic CDOwith its fourth managed deal in the space of a year. But with spreads for investment-gradecredit default swaps so tight, the firm has moved down the credit spectrum, constructinga portfolio with a greater proportion of BB rated names.

The latest deal, United Global Credits CDO IV, is arranged by Goldman Sachs – thesecond time UOB has partnered with the bank, following a $1.702 billion dealin March – and is backed by a $1.5 billion portfolio of 106 corporate creditsfrom Asia, Europe and the US.

The structure comprises three tranches of notes: the Class A notes are worth$21.6 million and are rated AAA by Standard and Poor’s; the Class B notesare rated AA and are worth $20 million; while the $17.4 million of Class C notesare rated A–. Goldman Sachs will risk-manage the equity tranche.

Unlike previous transactions this deal has a greater proportion of BB names,which will comprise up to 15% of the portfolio. The reason, says Kon Chee Keat,Singapore-based executive director at UOB, is that these credits offer a significantpick-up compared to BBB names.

“If you see what is happening in the market, BBB credits are very tight, but someBB credits actually offer good value,” he says. Spreads on some BBB creditsare as tight as 50 basis points (bp), while BB names can range between 200–300bpand above, he adds. “So we thought there was a pocket of opportunity there.” NS,SF

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